Meaning of security

A security is a document that is an evidence of specific claims on a stream of income and/or the particular assets. Debt securities include bonds and mortgages. Ownership securities include common stock certificates and the title to marketable assets. In addition, preferred stock is a hybrid security which entitles its owner to a mixture of both ownership and creditor ship privileges.

A good security should have the following characteristics:

1. Free from encumbrances

2. Easy marketability

3. Easy storability

4. Durability

5. Free from price fluctuations

6. Easy ascertainment of value

7. Earning of income

8. Free from heavy cost of handling

9. Free from disabilities

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Composition of the Money Market

The money market is composed of several financial agencies that deal with different types of short-term credit. We may describe the following important components of the money market:

1. Call Money Market: It is a market for short-period loans. Bill brokers and dealers in stock exchange require financial accommodation for very short periods. Money may be lent for periods not exceeding seven days. Sometimes money is lent only overnight. These loans are called call loans or call money as the banks recall these loans at very short notice. The banks prefer this kind of investment for two reasons.

Firstly, call loans can be treated almost like cash and they form the second line of defence for the banks after cash. Secondly unlike cash, the call loans earn some income, in the form of interest, for the banks. The commercial banks are the lenders and the bill brokers and dealers in stock exchange are the borrowers in the call money market. The call money market is an important section of the money market.

2. Collateral Loan Market: When loans are offered against collateral securities like stocks and bonds, they are called ‘collateral loans’ and the market is known as the collateral loan market. This market is geographically most diversified.

3. Acceptance Market: It refers to the market for bankers acceptances which arise out of trade-both inland and foreign. When goods are sold to anyone on credit, the buyer accepts a bill. Such a bill cannot be discounted anywhere easily. The banker adds his credit to the bill by accepting it on behalf of his customer who has purchased the goods. Such bills can be discounted anywhere. In London, there are specialist firms called acceptance houses which accept bills drawn on them by traders. They are well known all over the world. In the past, the acceptance market was a prominent section of London money market. Its importance has declined considerably in recent years. The function of the acceptance houses is being performed by the commercial banks is several countries.

4. Bill Market or Discount Market: It refers to the market where short-dated bills and other paper is discounted. Before the First World War the most important paper discounted in the London money market was the commercial bill which was used to finance both inland and foreign trade. During the inter-war period the importance of the commercial bills declined. This place has been taken by treasury bills. The treasury bills are promissory note of the government to pay a specified sum after a specified period, generally 90 days. The treasury bills are purchased by the investors and when necessary they are discounted in the discount market.

These markets are not water-tight compartments. They are related to one another.

The borrowers in the call money market deal in treasury bills which are discounted with them. Acceptance houses accept bills which are later discounted in the discount market. Thus, the various sections of the money market are intimately related to and are dependent on one another.

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Meaning of Letter of Credit

A Letter of Credit has been defined by the International Chamber of Commerce as “an arrangement, however, named or described whereby a bank (the issuing bank) acting at the request and in accordance with the instructions of a customer (the applicant of the credit), is to make payment or to the order of a third party (the beneficiary) or is to pay, accept or negotiate Bills of Exchange (Drafts) drawn by the beneficiary or authorise such payments to be made or such drafts to be paid, accepted or negotiated by another bank, against stipulated documents and compliance with stipulated terms and conditions.”

From the above definition of Letter of Credit, it is clear that there are following parties to a Letter of Credit.

(1) The buyer.

(2) The beneficiary.

(3) The issuing bank.

(4) The notifying bank.

(5) The negotiating bank.

(6) The confirming bank.

(7) The paying bank.

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Legal Position of Entries in the Pass Book

It is difficult to define precisely the decisive legal effects of entries shown in the pass book. When it is issued to customer and if he does not raise any objection, obviously it becomes “account stated” or “settled account” between him and the banker. But there has been a conflict of opinion regarding conclusiveness of the pass book regarding entries made therein. Sir John Paget is of the view that “the proper function of a pass book is to constitute a conclusive, unquestionable record of the transactions between banker and customer, and it should be recognised as such.” He cites Daveyness Vs Noble case in support of his view. In this case, it was stated that on delivery of the pass book to the customer, he examines it and if there appears an error or omission, sends it back for rectification or if not, his silence is regarded as an admission that the entries are correct. In Vagliana Brothers Vs Bank of England, also it was held that “the return of a balanced pass book by the customer without comments amounts to settlement of account.” So, the return of pass book by the customer renders as a stated and settled account as on the particular date of balancing.

But the legal position both in England and in India is quite different. According to recent judicial decisions in England and India, the entries in the pass book cannot be regarded as a conclusive proof of their accuracy and as settled account. Any entry in the pass book is open to comparison and verification by customer. The customer can legitimately question the entries at any time whenever he notices them. The banker is bound to make the suitable corrections. The entries wrongly made or included may be advantages either to the customer or the banker. Both the parties can indicate the mistakes or omissions to get them rectified.

So entries made upto date are prima facie evidence and not conclusive evidence. In Keptigulla Rubber Estates Co. Vs National Bank of India, it was held that “When a pass book is returned to the bank by the customer without objection, the account cannot be regarded as settled account and it is not binding on both the banker and customer. In Mowji Vs Registrar of Cooperative Societies, Madras, it was stated that “the entries in the pass book can be regarded as prima facie evidence and not conclusive evidence.” Thus entries in the pass book are not conclusive evidence of their correctness, in stating the position of customer’s account. They are subject to alternation on the basis of real facts.

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Precautions in Writing a Pass Book

While writing the pass book, the bank should take the following precautions:

(1) The customer should be requested to present the pass book for completion periodically.

(2) All the entries in the pass book must be invariably installed by a responsible official as a proof of having verified the entries.

(3) The pass book must be returned to the customer after it is updated so that he has an opportunity of examining it.

(4) When the pass book is sent back or handed over the customer, the date should be noted in the ledger together with initials of the clerk who writes it.

(5) While sending the pass book to the customer, the banker should take steps to ensure the secrecy of its contents.

(6) In case of loss of pass book, duplicate copy should be marked with the word “Duplicate” and the fact should be recorded in the ledger also.

(7) The banker should indicate to the customer to intimate the objections, if any, from time to time.

(8) Confirmation letter should be sent to the customer regarding the balance standing to the credit of his account. A certificate may be enclosed along with the statement of account asking for an acknowledgement of the balance as correct. If the account shows a debit balance, it will operate as an acknowledgement of debt and would extend the period of limitation. Read More

Meaning of commercial bank

A commercial bank is a profit-seeking business firm, dealing in money and credit. It is a financial institution dealing in money in the sense that it accepts deposits of money from the public to keep them in its custody for safety. So also, it deals in credit, i.e., it creates credit by making advances out of the funds received as deposits to needy people. It thus, functions as a mobilizer of saving in the economy.

A bank is, therefore like a reservoir into which flow the savings, the idle surplus money of households and from which loans are given on interest to businessmen and others who need them for investment or productive uses.

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